Indian e-commerce firms douse cash burn, catch up with global peers

Flipkart spent about $80 million monthly as of March, down from $100 million in early 2016. Rival Amazon India’s monthly cash burn amounted to $150 million, down from $250 million.Varsha Bansal | ET Bureau | August 10, 2018, 08:59 IST

Indian e-commerce companies, heavily criticised for discounting and mounting losses, reduced their rate of expenditure last year and their performance is in line with their peers overseas.

Online retailers in India spent about $15 on every $100 of gross merchandise value earned in 2017, according to a report by Trifecta Capital, a venture capital fund, and RedSeer Management Consulting. This so called cash burn compares with $16 in 2016 and $22 in 2015, when companies spent heavily on employees and marketing, dragging down efficiency, according to the report titled, ‘The Rise of $50 Billion E-Bazaar’.

Comparatively, China’s JD.com, an inventory-model online retailer founded in 1998, made losses as recently as two years ago, broadly at -10% of GMV, according to RedSeer. While experts said the performance of Indian ecommerce companies is in line with similar companies overseas, profitability still seems distant.

“Typically, for a large ecommerce company, it’s either usually a very small profit margin of 2-3% or slightly negative at -5 or -10%,” said Mrigank Gutgutia, engagement manager at RedSeer. “On that basis, we can say that Indian ecommerce companies are on the right track.”

Apart from a reduction in costs, some experts said the drop in cash burn for ecommerce companies is simply because the burden of expenses has shifted to manufacturers and sellers. According to industry estimates, sellers and ecommerce companies bear almost equally the discount given on smartphones, the largest category for online retailers. For other categories, sellers bear around 20-30% of the discount.

“Customer acquisition cost has not come down at all, with a large chunk of it being taken care of by the seller directly,” said Harsh Shah, cofounder of ecommerce firm Fynd. “Moreover, most ecommerce platforms have started additional revenue streams, leading to more revenue coming from outside of ecommerce operations.”

According to industry estimates, Flipkart spent about $80 million monthly as of March, down from $100 million monthly in early 2016. Rival Amazon India’s monthly cash burn amounted to $150 million, down from $250 million.

Flipkart did not respond to a query sent by ET seeking comment. Amazon India declined to comment.

Experts said an increased focus on performance-based affiliate marketing and reduced logistics costs have helped pull down cash burn. They peg the drop in logistics cost at 30-35% and the reduction in talent cost at 10-15%.

“Over the last two years, we have seen big (ecommerce) players have toned down on their spends on television ads, radio ads and hoardings and have increased spends on performance-driven channels like affiliate marketing,” said Swati Bhargava, cofounder of cashback site CashKaro, which works with Flipkart and Amazon India. “With a clear shift from a GMV focus to a revenue focus, companies prefer affiliate marketing because they will only have to pay once a sale is made.”

“The focus on unit economics has come back,” said Aakash Goel, a partner at Trifecta Capital. “In vertical ecommerce, this notion of unit economics is definitely here to stay because investors also have set a bar of revenue and unit economics. So the founders will continue to invest and ration their marketing dollars accordingly.”